America’s pharmaceutical system — from supply chains to manufacturing to payment mechanisms — isn’t working as it should. One in five American adults reported that they couldn’t afford necessary prescriptions last year. Over a thousand drugs are currently in shortage in the US, including 27 medications needed to fight the COVID-19 pandemic. When patients can’t get prescribed medications, health outcomes worsen and costs increase for patients and the overall health system.

Last month, California Governor Gavin Newsom signed SB 852, authored by Senator Richard Pan (D-Sacramento). It’s the latest effort by state policymakers to rectify these problems. SB 852 requires the state to establish new partnerships for the production or distribution of generic prescription medications, provides guidelines on factors the state will consider when choosing which generic drugs to prioritize, and directs the California Health and Human Services Agency (CHHS) to carry out the program. If the legislature appropriates more funds, CHHS will assess the feasibility of the state manufacturing and distributing generic drugs.

New state-led efforts like SB 852 could address the market failures that have plagued the country for decades. When markets work effectively, generic drugs are a cost-savings powerhouse. When generics enter the marketplace, prices for a drug typically fall by nearly 40%. Drug prices fall further with each additional generic manufacturer entering the market. When the number of companies manufacturing a drug reaches six, the median generic price of that drug falls to just 5% of the brand price. The estimated $292 billion in annual savings from generic drugs is felt in hospitals, outpatient clinics, pharmacies, and throughout the US health care system (PDF), and it benefits patients with any type of insurance as well as people with no coverage.

Higher Costs, Shrinking Supplies

Unfortunately, pharmaceutical markets are susceptible to market failures, price fixing, and other distortions. We’ve seen several instances of this in recent years, including widespread shortages of EpiPens (injectable epinephrine) for field treatment of anaphylactic shock and the 5,000% price increase for the life-saving toxoplasmosis treatment Daraprim (pyrimethamine). Drugs that are complex to manufacture tend to have less competition and are more subject to supply shortages that hurt clinical outcomes and add costs to the health system. Price hikes are commonly seen in monopolized markets and when a manufacturer seeks a higher return without improving the drug. Patients who need these drugs may be forced to receive less appropriate medications, delay treatment, or go without treatment entirely, causing worse health outcomes and higher costs.

So how might the state-sponsored generic drug label envisioned in SB 852 address these problems? Only a small number of generics are responsible for the most egregious price increases, making them a great target for state manufacturing. In cases where few manufacturers are making a drug, the mere announcement of a new entrant could put downward pressure on artificially high prices. Providing drugs at cost without rebates is intended to improve market transparency, making it easier for payers and patients to know where their dollars are going.

Beyond focusing on drugs susceptible to big price increases or frequent shortages, a state-sponsored generic drug label could produce drugs with great savings potential that meet important public health needs, such as insulin. Unlike private companies that must post a profit, a state label could put aside profits to focus on patients. California could enter markets long seen as unprofitable by manufacturers obligated to generate returns for investors.

While the project is in its early stages and could take different forms, SB 852 and the potential creation of a state-sponsored generic drug label could enable California to address market failures — and bring the nation closer to the goal of affordable, accessible, essential medicines for patients.

Emily Estus

Emily Estus, a 2020 graduate fellow at the California Health and Human Services Agency, is a MPP/MPH student at UC Berkeley. She previously researched mental health policy for Well Being Trust and analyzed health equity in mosquito control for the Alameda County Mosquito Abatement Agency. Before coming to California, she worked in consulting, campaigns, and think tank advocacy in Washington, DC.